Part 1Suppose $150,000150,000 is deposited at a bank. The required reserve ratio is 2525 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total reserves?Part 2Total reserves are $[input]enter your response here . (Round your response to the nearest dollar.)

Question

Part 1Suppose ​$150,000150,000 is deposited at a bank. The required reserve ratio is 2525 ​percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves?Part 2Total reserves are ​$[input]enter your response here .​ (Round your response to the nearest​ dollar.)

BlackTom AI · Accepted Answer

Question restatement: Part 1: A deposit of $150,000 is made at a bank. The required reserve ratio is 25 percent. The bank does not hold any excess reserves and instead makes loans. Part 2 asks for the total reserves, to be entered rounded to the nearest dollar.

Step-by-step analysis:
- Start with the initial deposit of $150,000. This increases the bank's reserves by $150,000 because the deposited funds become part of the bank's reserve assets.
- The reserve requirement is 25%. This means the bank must hold 25% of checkable deposits as reserves. Since deposits are $150,000, the required reserves amount to 0.25 × 150,000 = $37,500.
- Since the bank is not holding any excess reserves, it will loan out the remaining funds beyond the required reserve. The amount available to loan equals reserves minus required reserves: $150,000 − $37,500 = $112,500.
- When the bank makes the $112,500 loan, the immediate effect is that the loan creates an asset (the loan) and reduces reserves by that loan amount, while the loan proceeds may be deposited back into the banking system. The key point for identifying total reserves after this process is that the bank must still hold the required reserves of $37,500 against its deposits. There is no excess reserve left, so total reserves settle at the required level.
- Therefore, the bank’s total reserves after allocating loans (and holding no excess) are $37,500.

Answer interpretation for Part 2: The problem asks for Total reserves as an amount to input, rounded to the nearest dollar. Since the calculation yields $37,500, the correct entry would be 37500.

Common pitfalls to avoid:
- Misreading the effect of loan creation: some might think reserves stay at $150,000, but the loan reduces the reserve cushion until only the required reserve remains.
- Forgetting the reserve requirement: it’s essential to compute 25% of $150,000 to determine the minimum reserves that must be held.
- Ignoring the “no excess reserves” condition: this ensures the bank does not hold any additional reserves beyond the required 25%.

Summary: The bank’s total reserves, under the stated assumptions, equal $37,500, so the Part 2 entry should be 37500.

Quiz:Quiz 2

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